Duma Plan to Target Shadow Business will Anger Many and Achieve Little, Experts Say

Paul Goble

            Staunton, August 3 – Even as protests against raising retirement ages continue and some suggest this Putin move recalls Gorbachev’s anti-alcohol campaign in terms of how it is undermining the regime (publizist.ru/blogs/34/26272/-), Moscow appears ready to adopt yet another measure that will infuriate the population without achieving what its authors hope for.

            A group of United Russia Duma deputies has come up with draft legislation that will increase fines by 40 times on those engaged in illegal entrepreneurial activity, that is, on those who fail to register their actions with the state and thus avoid paying taxes or living by the rules (profile.ru/economics/item/126445-v-pogone-za-tenyu).

                United Russia leaders have approved the idea but suggested that the amount of increase in the size of fines should be reduced.  But both representatives of other parties in the Duma and independent experts say that this move will not lead to massive registration or any windfall for the government in terms of revenue, Igor Naumov of the Profile portal reports.

            According to recent studies, more than 14.6 million Russians over the age of 15 work in the “informal” or “shadow” sector – or just over 20 percent of all the employed population. And because many work part time in this sector, as many as 33 million Russians, 44.8 percent of all employed, are part of it as well.

            These numbers have all been rising, Andrey Nazarov of Delovaya Rossiya says, even though conditions for conducting business in Russia have been improving. The reason people don’t register is fear of government supervision and control and the burden taxes and reporting requirements impose on their activities.

            The current size of fines for this type of economic activity mean that many simply ignore them or treat them as a cost of doing business, one far lower than they would have to pay if they were operating in compliance with the state.  But raising these fines will do little to end the problems the state has with the biggest offenders, experts say.

            The Russian shadow economy forms 39 percent of the country’s GDP, but it is not one thing but rather several and approaching all of them in the same way will not work.   According to Aleksey Kalachev of FINAM, the authorities need to recognize this and devise different approaches to different aspects of the problem.

           

            Truly criminal activity will never be registered by anyone no matter how high the fines are, he says; and what many call “the garage economy,” while it involves many people who are engaged in relatively small but economically important activities. Moreover, its suppression would beyond question trigger popular anger and possibly protests. 

            Between these two are firms that don’t register and might do so to avoid higher fines. But the largest of them won’t because they will treat any fines as a cost of doing business or seek to avoid paying them by the use of their relationships with the authorities. In any case, Kalachev says, the total value of these firms is far smaller than many imagine.

            What needs to be done instead of a one-size-fits-all fine regime, the economic analyst argues, is to change the registration requirements to make it easier for individuals to register and report their incomes combined and combine that with better enforcement of existing laws governing truly illegal economic operations.